nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒03‒09
fourteen papers chosen by
Georg Man

  1. The Transitional Dynamic of Finance Led Growth By Razzak, Weshah; El Bentour, M
  2. Financial Crises and Innovation By Bryan Harcy; Can Sever
  3. Macroeconomic Policy, Product Market Competition, and Growth: The Intangible Investment Channel By JaeBin Ahn; Romain A Duval; Can Sever
  4. Productivity Growth : Patterns and Determinants across the World By Kim,Young Eun; Loayza,Norman V.
  5. The benefits are at the tail: uncovering the impact of macroprudential policy on growth-at-risk By Jorge E. Galán
  6. Trade Integration and Growth : Evidence from Sub-Saharan Africa By Calderon,Cesar; Castillo Castro,Catalina
  7. Impact of Trade Policy Reforms on Manufacturing Firms’ Performance in Nigeria By Folorunso Oshodi, Ayodele; Aremu Muhammed, Ismail
  8. Developing Public-Private Partnership Initiatives in the Middle East and North Africa : From Public Debt to Maximizing Finance for Development By Arezki,Rabah; Belhaj,Ferid
  9. Could Rising Household Debt Undercut China’s Economy? By Jeffrey B. Dawson; Hunter L. Clark
  11. Microentrepreneurship in Developing Countries By Seema Jayachandran;
  12. Beyond the S-curve : Insurance Penetration, Institutional Quality and Financial Market Development By Gine,Xavier; Barboza Ribeiro,Bernardo; Wrede,Peter Friedrich Wilhelm
  13. Infrastructure and Finance: Evidence from India's GQ Highway Network By Das,Abhiman; Ghani,Ejaz; Grover,Arti Goswami; Kerr,William Robert; Nanda,Ramana
  14. Heterogeneity and state dependence in firms’ access to credit: Microevidence from the euro area By Gabriele Angori; David Aristei

  1. By: Razzak, Weshah; El Bentour, M
    Abstract: We depart from the empirical literature on testing the finance led growth. Instead of regression analysis, we use a semi-endogenous growth model, which identifies two productivity growth paths: a steady state and a transitional path. Steady state growth is anchored by population growth. In the transitional dynamic, productivity growth depends on the typical factors growth rates, and excess knowledge, which is the deviation of TFP in the financial sector from steady state growth. TFP is endogenous. It is an increasing function of global research efforts, which is driven by the proportion of population in developed countries that is engaged in research in finance, and the stock of human capital. We find positive evidence for this theory of TFP in the data of ten developed European countries and the United States. We also found some evidence for finance-led-growth, albeit weaker after the past Global Financial Crisis.
    Keywords: Semi endogenous growth, finance, productivity growth
    JEL: E10 O40
    Date: 2020–02–03
  2. By: Bryan Harcy; Can Sever
    Abstract: Financial crises are accompanied by permanent drops in economic growth and output. Technological progress and innovation are important drivers of economic growth. This paper studies how financial crises affect innovative activities. Using cross-country panel data on patenting at the industry-level, we identify a financial channel whereby disruptions in financial markets impact patenting activity. Specifically, we find that patenting decreases more following banking crises for industries that are more dependent on external finance. This financial channel is not at play during currency crises, sovereign debt crises, or recessions more generally, suggesting that disruption in banking activity matters for investment in innovative activities. The effect on patenting is economically large and long-lasting, resulting in less patenting, in terms of both total quantity and quality, for 10 years or longer after a banking crisis. The average patent quality, however, does not appear to decline. We show the results are not likely to be driven by reverse causality or omitted variables. These findings provide a link between banking crises and the observed patterns of lower long-term growth. Liquidity support in the aftermath of banking crises appears to help reduce the effects through the financial channel over the short term.
    Keywords: innovation, financial crises, banking crises, patents, growth
    JEL: E44 F30 G15 G21 O31
    Date: 2020–03
  3. By: JaeBin Ahn; Romain A Duval; Can Sever
    Abstract: While there is growing evidence of persistent or even permanent output losses from financial crises, the causes remain unclear. One candidate is intangible capital – a rising driver of economic growth that, being non-pledgeable as collateral, is vulnerable to financial frictions. By sheltering intangible investment from financial shocks, counter-cyclical macroeconomic policy could strengthen longer-term growth, particularly so where strong product market competition prevents firms from self-financing their investments through rents. Using a rich cross-country firm-level dataset and exploiting heterogeneity in firm-level exposure to the sharp and unforeseen tightening of credit conditions around September 2008, we find strong support for these theoretical predictions. The quantitative implications are large, highlighting a powerful stabilizing role for macroeconomic policy through the intangible investment channel, and its complementarity with pro-competition product market deregulation.
    Date: 2020–02–07
  4. By: Kim,Young Eun; Loayza,Norman V.
    Abstract: This is the background paper for the productivity extension of the World Bank?s Long-Term Growth Model (LTGM). Based on an extensive literature review, the paper identifies the main determinants of economic productivity as innovation, education, market efficiency, infrastructure, and institutions. Based on underlying proxies, the paper constructs indexes representing each of the main categories of productivity determinants and, combining them through principal component analysis, obtains an overall determinant index. This is done for every year in the three decades spanning 1985?2015 and for more than 100 countries. In parallel, the paper presents a measure of total factor productivity (TFP), largely obtained from the Penn World Table, and assesses the pattern of productivity growth across regions and income groups over the same sample. The paper then examines the relationship between the measures of TFP and its determinants. The variance of productivity growth is decomposed into the share explained by each of its main determinants, and the relationship between productivity growth and the overall determinant index is identified. The variance decomposition results show that the highest contributor among the determinants to the variance in TFP growth is market efficiency for Organisation for Economic Co-operation and Development countries and education for developing countries in the most recent decade. The regression results indicate that, controlling for country- and time-specific effects, TFP growth has a positive and significant relationship with the proposed TFP determinant index and a negative relationship with initial TFP. This relationship is then used to provide a set of simulations on the potential path of TFP growth if certain improvements on TFP determinants are achieved. The paper presents and discusses some of these simulations for groups of countries by geographic region and income level. An accompanying Excel-based toolkit, linked to the LTGM, provides a larger set of simulations and scenario analysis at the country level for the next few decades.
    Keywords: Educational Sciences,Economic Theory&Research,Economic Growth,Industrial Economics,Judicial System Reform,International Trade and Trade Rules,Legal Reform,Regulatory Regimes,Social Policy,Common Property Resource Development,Legal Products,Legislation
    Date: 2019–05–10
  5. By: Jorge E. Galán (Banco de España. Financial Stability and Macroprudential Policy Department)
    Abstract: This paper brings together recent developments on the growth-at-risk methodology and the literature on the impact of macroprudential policy. For this purpose, I extend the recent proposals on the use of quantile regressions of GDP growth by including macrofinancial variables with early warning properties of systemic risk, and macroprudential measures. I identify heterogeneous effects of macroprudential policy on GDP growth, uncovering important benefits on the left tail of its distribution. The positive effect of macroprudential policy on reducing the downside risk of GDP is found to be larger than the negative impact on the median, suggesting a net positive effect in the mid-term. Nonetheless, I identify heterogeneous effects depending on the position in the financial cycle, the direction of the policy, the type of instrument, and the time elapsed since its implementation. In particular, tightening capital measures during expansions may take up to two years in evidencing benefits on growth-at-risk, while the positive impact of borrower-based measures is rapidly observed. This suggests the need of implementing capital measures, such as the countercyclical capital buffer, early enough in the cycle; while borrower-based measures can be tightened in more advanced stages. Conversely, in downturns the benefits of loosening capital measures are immediate, while those of borrower-based measures are limited. Overall, this study provides a useful framework to assess costs and benefits of macroprudential policy in terms of GDP growth, and to identify the term-structure of specific types of instruments.
    Keywords: financial stability, growth-at-risk, systemic risk, macroprudential policy, quantile regressions
    JEL: C32 E32 E58 G01 G28
    Date: 2020–03
  6. By: Calderon,Cesar; Castillo Castro,Catalina
    Abstract: This paper examines the growth effects of different dimensions of international trade integration -- notably, volume, diversification, and natural resource dependence -- in Sub-Saharan Africa. First, the paper documents the recent trends in these foreign trade dimensions for the region and the traditional sources of growth. Second, it empirically estimates the impact of trade integration on growth per worker and the sources of growth; that is, growth of capital per worker and total factor productivity growth. To accomplish this task, the analysis uses a sample of non-overlapping five-year period observations for 173 countries from 1975 to 2014. The econometric evidence shows that increased trade openness, greater export production diversification, and reduced export dependence from natural resources will have a positive causal impact on economic growth. These effects will be mainly transmitted through faster capital accumulation or enhanced total factor productivity growth. Finally, the paper finds that, despite the progress exhibited in trade openness and diversification over the past decade, there are still potential benefits that can be accrued if countries were to deepen their integration to world trade.
    Keywords: International Trade and Trade Rules,Global Environment,Energy and Natural Resources,Coastal and Marine Resources,Trade and Services,Economic Theory&Research,Economic Growth,Industrial Economics
    Date: 2019–05–20
  7. By: Folorunso Oshodi, Ayodele (University of Ilorin, Kwara, Nigeria); Aremu Muhammed, Ismail (University of Lagos, Lagos, Nigeria)
    Abstract: The pivotal role of the manufacturing sector in guaranteeing a relatively sustainable growth and generating employment has made both public and private actors take interest in factors that might influence manufacturing performance; trade policy reforms inclusive. Consequently, policy makers and the government has taken steps to influence manufacturing performance through trade policy reforms, in form of tariff reduction. The paper examined the impact of trade policy reforms on manufacturing firms’ performance in Nigeria. Panel data were collected for 57 quoted firms in Nigeria across 15 manufacturing industries. The fixed and random effects models were examined, while the Hausman specification test judged the random effects model to be the most appropriate. Chow break-point test also suggested the existence of structural break, and hence, the break was controlled for. The findings reveals that tariff has significant negative impact on manufacturing firms value added (performance) in Nigeria. The negative impact of tariff is however, much obvious in the printing and publishing and aluminium industries/ sub-sectors. We therefore, recommend that selective imposition of tariff on different products at different time should be implemented in conjunction with sector-specific reforms for enhanced manufacturing performance in Nigeria.
    Keywords: manufacturing; trade policy; economic growth; industrialisation
    Date: 2020–02–26
  8. By: Arezki,Rabah; Belhaj,Ferid
    Abstract: This paper argues for a novel approach to financing infrastructure needs in Arab countries. It first describes the context of rising public debt in the region, contrasting it with the vast infrastructure needs. It then discusses the challenges in meeting these needs with traditional financing. The paper then makes the case for maximizing finance for development, by using public-private partnerships, and presents a few successful examples in Arab countries. Finally, the paper explores the way forward and concludes on the need for strong state capacity and integrity to promote the maximizing finance for development approach.
    Keywords: Private Sector Economics,Energy Policies&Economics,Financial Sector Policy,Finance and Development,Financial Economics,Macroeconomic Management
    Date: 2019–05–24
  9. By: Jeffrey B. Dawson (Research and Statistics Group); Hunter L. Clark (Research and Statistics Group)
    Abstract: Although there has been a notable deceleration in the pace of credit growth recently, the run-up in debt in China has been eye-popping, accounting for more than 60 percent of all new credit created globally over the past ten years. Rising nonfinancial sector debt was driven initially by an increase in corporate borrowing, which surged in 2009 in response to the global financial crisis. The most recent leg of China?s credit boom has been due to an important shift toward household lending. To better understand the rise in household debt in China and its implications for financial stability and China?s economic performance, it is important to examine the expansion in household credit, how the rise in debt compares to international experience, and the associated risks.
    Keywords: bank credit; China; household debt
    JEL: E6
  10. By: Woldie, Desalegn Teshale
    Keywords: Community/Rural/Urban Development
    Date: 2019–02
  11. By: Seema Jayachandran;
    Abstract: This article reviews the recent literature in economics on small-scale entrepreneurship (“microentrepreneurship”) in low-income countries. Major themes in the literature include the determinants and consequences of joining the formal sector; the impacts of access to credit and other financial services; the impacts of business training; barriers to hiring; and the distinction between self-employment by necessity and self-employment as a calling. The article devotes special attention to unique issues that arise with female entrepreneurship.
    JEL: L26 J16 J24
    Date: 2020
  12. By: Gine,Xavier; Barboza Ribeiro,Bernardo; Wrede,Peter Friedrich Wilhelm
    Abstract: This paper provides new evidence of factors, other than GDP per capita, that correlate with the development of insurance markets. Based on 20 years of insurance premium data from 180 countries, and a similar wealth of data on institutions and financial market development, the paper presents important correlates of insurance market development. Although the analysis cannot identify which factors directly cause insurance market growth, the results suggest that interventions aimed at stimulating insurance supply and demand should take enabling factors, such as the quality of institutional governance and the degree of financial market development, into consideration.
    Keywords: Insurance&Risk Mitigation,Economic Growth,Industrial Economics,Economic Theory&Research,Pollution Management&Control,Judicial System Reform,Financial Sector Policy
    Date: 2019–06–27
  13. By: Das,Abhiman; Ghani,Ejaz; Grover,Arti Goswami; Kerr,William Robert; Nanda,Ramana
    Abstract: This paper uses the construction of India's Golden Quadrangle central highway network, together with comprehensive loan data from the Reserve Bank of India, to investigate the interaction between infrastructure development and financial sector depth. The paper identifies a disproportionate increase in loan count and average loan size in districts along the Golden Quadrangle highway network, using stringent specifications with industry and district fixed effects. The results hold in straight-line instrumental variable frameworks and are not present in placebo tests with another highway that was planned to be upgraded at the same time as Golden Quadrangle but subsequently delayed. Importantly, however, the results are concentrated in districts with stronger initial financial development, suggesting that although financing responds to large infrastructure investments and helps spur real economic outcomes, initial financial sector development might play an important role in determining where real activity will grow.
    Keywords: Pulp&Paper Industry,Textiles, Apparel&Leather Industry,General Manufacturing,Food&Beverage Industry,Common Carriers Industry,Construction Industry,Plastics&Rubber Industry,Business Cycles and Stabilization Policies,Roads and Highways Performance,Roads&Highways,Inter-Urban Roads and Passenger Transport,Transport Services,Financial Sector Policy,Economic Growth,Industrial Economics,Economic Theory&Research
    Date: 2019–06–13
  14. By: Gabriele Angori (Università degli Studi di Ferrara); David Aristei (University of Perugia)
    Abstract: Using detailed firm-level longitudinal data, this paper analyses the main factors affecting firms’ access to bank credit in eleven euro area countries over the period 2014-2018. We focus on firms’ loan demand behaviour and on banks’ actual credit granting decision, using alternative measures of financing constraints and controlling for endogenous sample selection and individual heterogeneity. Furthermore, we explicitly analyse the dynamics of firms’ access to credit and account for state dependence in loan demand and credit rationing probabilities. Empirical results show that small and informationally opaque businesses, with deteriorated public support and credit history, experience greater difficulties in accessing to bank loans. Moreover, we provide evidence of significant state dependence in access to credit over time. In particular, firms having already experienced credit restrictions in the past are more likely to face further financing constraints, while enterprises that repeatedly recur to external financing seem to have an easier access to credit. Finally, focusing on the subset of firms that actually need bank financing, we find that previous credit restrictions significantly reduce current demand probability, thus providing evidence of a significant credit discouragement effect.
    Keywords: Access to credit; Financing constraints; State dependence; Sample selection; Unobserved heterogeneity; Panel data
    JEL: G32 G21 D22 C23 C34
    Date: 2020–02

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